The demographic and expertise-based makeup of public company boards has come under increasing scrutiny from investors as numerous studies continue to correlate elements of diversity with improved company performance.
The National Association of Corporate Directors’ Report of the NACD 2016 Blue Ribbon Commission on Building the Strategic-Asset Board emphasized the essential task of assembling and assessing a board best fit to tackle the challenges of the constantly-changing business environment. At its core, the successful strategic-asset board is a mix of directors with diverse backgrounds who are fit to the purpose of complex oversight. And the demand for diversity is not just about market-based performance—the evidence also shows that diverse boards engage in more robust debates, make decisions that are sounder than they would be otherwise, better understand their customers, and attract higher-performing employees.
For smaller public companies in the U.S., underperformance in board diversity is even more pronounced. In November 2016, Equilar released a report revealing that small public companies lag behind S&P 500 companies when it comes to board diversity. For example, 23.3 percent of Russell 3000 companies in 2016 had all-male boards versus 1.4 percent of S&P 500 boards.
But does this study tell the whole story? Gender diversity on boards understandably receives the most attention because it’s one of the easiest metrics to quantify. However, measuring progress with the broad brush stroke of S&P 500 (or even Russell 3000) gender statistics does a disservice to the full story of diversity on a company’s board. Diversity in the boardroom best serves a corporation when it’s addressed in a holistic manner, taking into account age, experience, race, and skill sets along with gender. In fact, when the U.S. Securities and Exchange Commission (SEC) adopted diversity disclosure rules in 2009, it allowed companies to provide their own definition of diversity.
At Nasdaq, we’ve taken a detailed look at the board composition of listed companies, including those too small to be included in much-publicized diversity studies. In doing so, we found promising signs of progress. For example, 14 Nasdaq companies have reached or exceeded gender parity in the boardroom versus five companies in the S&P 500. In 2016, 75 women were elected to a Nasdaq-listed company board for the first time. Many of these women came from outside the C-suite, recruited from non-corporate professional disciplines such as university administration, government, medicine, public education, and journalism.
We also discovered that many Nasdaq companies have compelling stories to tell with respect to board composition and their own diversity of age, gender, race, and skill sets. Unfortunately, their efforts go largely unnoticed for the simple reason that they aren’t sharing their story. Only a handful of companies highlight board composition in their proxies using charts and graphs to summarize their board profile metrics. Yet these metrics offer stakeholders valuable insights into the board’s ability to oversee and support management and its strategic plan.
At Nasdaq, we see ourselves not just as a public company, but also as a model for our nearly 3,000 listed issuers. One example of this is our 2016 Proxy Statement in which we enhanced board transparency through graphics and statistics on a variety of metrics. This data illustrates not only the gender diversity of our board, but also the diversity of skills and experience present. We believe this information is valuable for shareholders and the market and we will continue to share it.
As the head of the SEC, an agency focused on disclosure to investors, Chair Mary Jo White observed in a recent speech that “A growing number of company proxy statements have recently begun to voluntarily provide an analysis of data, accompanied by pie charts and bar graphs, to describe the state of the board’s gender, race and ethnic diversity composition, sometimes in addition to other categories… This more specific information is clearly more useful to investors.” In fact, we found a number of Nasdaq-listed companies (both small and large) that shared diversity metrics around board composition in their proxy statements in 2016. These companies include:
As companies continue to prepare for the upcoming proxy season, we encourage your board to consider simple report enhancements that increase the transparency around the diversity of boards, including disclosing not only a board member’s gender and age, but also their ethnicity, skills, and experience. Until such transparency of board composition metrics becomes the norm, the full story of corporate board diversity and the valuable insights it provides to investors will remain obscured.
Lisa Roberts is a vice president in Nasdaq’s Legal and Regulatory Group, where she co-leads the Listing Qualifications department and advises on governance matters for our issuer community. She also manages our Governance Clearinghouse website, which includes original articles on a variety of topics relevant to public companies, such as market structure, corporate sustainability, boardroom diversity, legislative advocacy, cybersecurity, and risk management. This site is available to all public companies and their advisors free of charge.
This communication and the content found by following any link herein are being provided to you by Nasdaq, Inc. for informational purposes only. The views and opinions expressed herein are the views and opinions of the author at the time of publication and may not be updated. They do not necessarily reflect those of Nasdaq, Inc. The content does not attempt to examine all the facts and circumstances which may be relevant to any particular situation and nothing contained herein should be construed as legal advice.
The National Association of Corporate Directors (NACD) counts nearly 17,000 directors and governance professionals among its members, and we’re proud to say that they are engaging in constant and committed learning in the spirit of doing the best for their companies.
We hear these questions over and over again from our directors: “What do my peers care about right now?” “What’s the next big issue for directors?” I think that you can tell a lot about what someone values by what they read, so it’s always fascinating to take a look at the reading trends of our membership. Their choices in 2016 reflect commitment to evergreen topics (director compensation, governance benchmarking, and finding a new board seat) and investment in understanding ever-evolving, of-the-moment risks and board-specific concerns (cybersecurity, ethics and compliance oversight, M&A, and strategy).
Below are the top 10 most-read NACD reports, surveys, and papers from 2016. If you haven’t picked up these resources yet, now is the time.
2015-2016 Director Compensation Report – NACD and compensation consultancy Pearl Meyer’s perennially popular survey on director pay helps boards benchmark their pay by analyzing how the subtleties of committee participation and the changing governance landscape impact pay structures.
Cyber-Risk Oversight Handbook – According to our annual survey of public company directors (mentioned above), 29 percent of directors believe that cybersecurity expertise needs to be strengthened on their boards to conduct sound oversight. Our handbook has never been more relevant, and bonus: it has a stamp of approval from the Department of Homeland Security.
Governance Challenges 2016: M&A Oversight – There was a clear member focus on M&A this year, and this piece united the perspectives of several of our content partners to offer the most recent thinking on director oversight of that topic.
Looking for more publications to strengthen your board’s work this year? Visit our topic-specific board resource centers.
Strategy, corporate performance, and corporate growth or restructuring were the most commonly cited governance priorities overall for respondents of the 2015–2016 NACD private company governance survey. But a closer look at the results by the type of business reveals distinct differences in director concerns.
This year, NACD for the first time published its survey report in three separate volumes organized around major ownership structures—family, investor, and employee-owned—to provide more customized analyses that address challenges specific to each company type.
Survey findings are drawn from some 712 responses to a questionnaire e-mailed to NACD members serving on private company boards representing each of the three ownership structures. The questionnaire was in the field between March and May 2015.
Family Business Boards
NACD’s survey results indicate that the boards of family businesses are likely to view long-term strategy and value creation as their top priorities. When considering executive performance horizons, a large portion of respondents from family business boards (49%) define “long-term” as more than three years. Twenty-four percent of respondents identified leadership development as one of the three most time-consuming tasks for their board, alongside strategic planning and corporate performance.
The results also indicate that despite their attention to long-term strategy and leadership development, 24 percent of family business boards do not have a formally written CEO succession plan. The lack of such a plan can complicate the effective transfer of leadership, whether between generations of family executives or from the family to outside management.
Boards of investor-owned companies or those that are supported by venture capital or private equity firms may comprise a mix of founders, management, and investors, depending on the company’s stage of development.
Venture capitalists and private equity firms, by the very nature of their work, are especially focused on results: they want the valuation of the company to increase, oftentimes at a quick clip. Not surprisingly, investor-owned company boards rigorously scrutinize the performance of the company and its executives. The majority of directors at investor-owned companies (61%), closely monitor profits, while 37 percent monitor sales to gauge the company’s performance and determine executive pay.
A significant 33 percent of respondents use cash flows, which offer insight into where and how the company generates income and how its cash is being deployed. The focus is not solely on financial metrics; 44 percent of investor-owned companies also use customer satisfaction as a gauge of the company’s strength.
Employee-Owned Company Boards
Executive talent management ranks as a high priority for the boards of employee-owned companies, which are owned at least partially by their employees, either directly or indirectly through a trust. The vehicles for employee ownership can take several forms, including employee stock ownership, stock options, and profit-sharing plans.
While profits and sales remain important metrics, a large number of respondents from employee-owned companies use metrics related to employee morale (52%) and employee turnover (32%). The prevalence of these metrics was particularly notable among employee-owned companies.
For further coverage of the private company surveys, please see the forthcoming September/October 2016 edition of NACD Directorship magazine.
To download NACD’s surveys of private companies or view guidance and tools for private companies, please visit the Resource Center for Private Company Governance at www.NACDonline.org/privatecocenter.